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Commerce Bancorp, Inc v. Interarch

December 16, 2010

COMMERCE BANCORP, INC., PLAINTIFF-RESPONDENT,
v.
INTERARCH, INC., AND SHIRLEY HILL, DEFENDANTS-APPELLANTS, AND RAYMOND KLUMB, DEFENDANT.



On appeal from Superior Court of New Jersey, Law Division, Camden County, Docket No. L-296-08.

The opinion of the court was delivered by: Parrillo, J.A.D.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

APPROVED FOR PUBLICATION

Argued November 30, 2010 - Decided Before Judges Skillman, Parrillo and Espinosa.

The opinion of the court was delivered by PARRILLO, J.A.D.

At issue is whether a corporation that voluntarily indemnifies its agent under the New Jersey Business Corporation Act, N.J.S.A. 14A:1-1 to 16-4, upon advice of counsel and after its own due diligence investigation, may sue, six years later, for restitution of that payment made after a civil jury verdict finding the corporate agent had acted in bad faith and outside the scope of her agency. The motion court construed the applicable provision, N.J.S.A. 14A:3-5(2), to bar the corporation from permissively indemnifying its agent under those circumstances and, therefore, granted summary judgment in favor of the corporation. We disagree and hold that the civil judgment creates no statutory presumption against indemnification. There being no other obstacle, either legal or equitable, to the agent's statutory indemnification, we reverse the grant of summary judgment in favor of plaintiff, Commerce Bancorp, Inc. (Commerce), and remand with direction to dismiss its declaratory judgment action against defendants InterArch, Inc. (InterArch) and Shirley Hill (Hill).

The relevant facts are not materially in dispute and have been set forth in our earlier, related opinion, DiMaria Construction, Inc. v. InterArch, 351 N.J. Super. 558, 563-66 (App. Div. 2001), aff'd o.b., 172 N.J. 182 (2002). Briefly stated, in December 1993, Commerce hired DiMaria Construction, Inc. (DiMaria) to perform the heating, ventilation, and air conditioning (HVAC) work on a newly constructed office building. Commerce also hired Interarch, owned by Hill, the wife of Commerce's founder and chairperson, Vernon Hill, to do interior design on the same project. In April 1994, Commerce terminated DiMaria, who then demanded arbitration on its breach of contract claim. Following arbitration, DiMaria was awarded $324,475 in damages, which the Law Division confirmed and we upheld. Commerce Bank, N.A. v. DiMaria Constr., Inc., 300 N.J. Super. 9, 13, 20-21 (App. Div.), certif. denied, 151 N.J. 73 (1997), cert. denied, 522 U.S. 1116, 118 S. Ct. 1053, 140 L. Ed. 2d 116 (1998). DiMaria then sued defendants for tortiously interfering with its construction contract with Commerce. A jury found defendants liable and awarded DiMaria $750,000 in compensatory damages and $75,075 in punitive damages. We affirmed the civil judgment, noting that "the jury could have reasonably concluded that defendants acted with malice, that is intentionally and without justification or excuse . . . from personal interest and thus stepped outside the scope of their agency . . . by scapegoating DiMaria for the project delays." DiMaria Constr., Inc. v. InterArch, supra, 351 N.J. Super. at 567, 570, 573.

Three months after our affirmance, on August 16, 2001, defendants sought statutory indemnification from Commerce for the DiMaria judgment. N.J.S.A. 14A:3-5(2). Commerce's Board of Directors (Board) referred the matter to a sub-committee of three directors, instructing them to report their findings to the Board's Audit Committee for its review, and to present its recommendation to the full Board. Blank Rome L.L.P., a law firm, was retained to investigate the factual and legal basis for the defendants' indemnification request.

Following a thorough review, Blank Rome issued a twenty-three page opinion letter to the Audit Committee on December 12, 2001, concluding that "[t]here is a legal and factual basis for [Commerce] to indemnify" defendants. Although the report discussed possible defenses to the indemnification claim, Blank Rome also advised that Commerce was not bound by the civil judgment in the DiMaria litigation adverse to defendants; was free to make its own decision; bore the burden of proof on the indemnification claim; and was likely to lose an indemnity lawsuit considering the testimony of its own employee admitting responsibility for DiMaria's discharge.

After considering the advice of outside counsel, the Audit Committee recommended to the Board that it indemnify defendants for the compensatory damages award, current and future interest, and legal fees incurred in the DiMaria matter, but not for the punitive damages component. On January 15, 2002, the Board passed a resolution finding that it would be "in the best interests of the Company . . . to provide the indemnification recommended by the Audit Committee . . ." and approved an indemnification payment to defendants in the approximate amount of $1.3 million.

During the next five years, following Commerce's merger with another bank, a number of shareholder derivative lawsuits were filed on behalf of the newly formed company against various officers and directors of Commerce, including its chairman, alleging, among other things, that Vernon Hill breached his fiduciary duty to Commerce, wasted corporate assets, and unjustly enriched himself at the corporation's expense. As a result of these multiple lawsuits, Commerce created a Special Litigation Committee (SLC), which, after its own investigation, concluded that the Board was "not fully apprised by their counsel of the full arsenal of legal defenses available to defeat the indemnification demand - some of which may have been dispositive of the indemnification claim - and consequently, . . . the Board could not have known that indemnification was improper."

Relying on the SLC's determination, on January 14, 2008, Commerce filed a two-count complaint sounding in declaratory judgment and breach of contract to set-off the amounts it provided in indemnification from other monies owed to defendants.*fn1 Following defendants' answer, both parties cross-moved for summary judgment. After hearing argument, the court granted Commerce's motion for partial summary judgment,*fn2 and denied defendants' cross-motion.

In so ruling, the judge held that N.J.S.A. 14A:3-5(2) of the Business Corporation Act does not permit a corporation to indemnify its agent after an adverse civil judgment, finding, in effect, that the agent did not act in good faith and in the best interests of the corporation. Although the statute provides that an adverse judgment does not create a presumption that the corporate agent fails to meet the applicable standard of conduct to qualify for indemnification, the judge construed this "anti-presumption" provision to be applicable only to criminal proceedings. The judge rendered this interpretation primarily on the structure of the statute, which addresses civil and criminal proceedings in separate sections, and also because, in his view, this construction leads to a more equitable result. We reach a contrary conclusion.

On appeal, a trial judge's statutory interpretation is reviewed de novo. State v. Gandhi, 201 N.J. 161, 176 (2010). Equally clear, our review is governed by well-settled rules of statutory construction. Our function, of course, is to ascertain and implement the statute's meaning. State v. Sutton, 132 N.J. 471, 479 (1993). This is a simple enough task when a statute is clear and unambiguous. If the language is plain and leads to an unambiguous result, "our interpretative process is over." Gandhi, supra, 201 N.J. at 177. In such cases, we need not look beyond the statutory terms, which are "accorded their normal sense and significance." Velasquez v. Jiminez, 172 N.J. 240, 256 (2002); see also N.J.S.A. 1:1-1. On the other hand, in the absence of unambiguous wording, we turn to extrinsic sources for guidance, "[c]entral among them is a ...


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